Real Estate Chronicle

A blog dedicated to real estate matters, finance as well as general economics and political economics issues. Posts written by Luigi Frascati, B.Econ. Your comments and suggestions are appreciated.

Wednesday, August 30, 2006

Capital Integration In North America: A Real Estate Perspective

Should the United States and Canada go the way of the European Union? And how would this affect real estate investing in both countries? Find out...

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For more than 70 years now, the Couchiching Institute on Public Affairs (http://www.couch.ca) has been asking some thought-provoking questions and encouraging lively, stimulating debates and action on a variety of key public policy issues. For example, it was at Couchiching, 56 years ago, that the idea of creating a North Atlantic Treaty Organization (NATO) was first floated publicly by Escott Reid, a senior official with the Canadian Department of External Affairs. NATO was established a year and a half later, reflecting almost exactly the vision that Reid outlined in his speech at Couchiching.

One such lively debate that is presently going on not only at the Institute but, indeed, in many political and economic circles all over Canada, is the effects that an integrated ‘Continentalism’ would have on different facets of the economies of both Canada and the United States. Here is a topic that is thought-provoking and, some might say, provocative!

Economic integration refers specifically to the free movement of goods and services, capital, and labour and the harmonization of the rules governing the operations of these three key economic elements. Both countries stand to reap the rewards and the benefits of opening up to the fullest their respective markets to cross-border competition and, above all, to the free flow of capital. Real estate investing would possibly become the forefront recipient of such benefits.

To be sure, capital integration is very much a political decision for Americans, Canadians and their elected governments. It is a big decision that all of us, on both sides of the border, would have to determine as democratic societies. Specifically as it relates to capital flows in North America, both countries eliminated wartime foreign exchange controls in the early 1950s. Thus, for most of the post-war period, the United States and Canada have benefited greatly from the free movement of capital and from competition in financial markets. Consequently, capital flows have played a very important role in North America’s development as a modern economic powerhouse.

Indeed, particularly through the 1950s, 1960s, and early 1970s, foreign savings helped finance the large investment projects that were necessary to develop industrial infrastructure and increase production potential, especially in the resource and manufacturing sectors. At the same time, both American and Canadian firms, corporations and consortiums were able to set up businesses and pursue investment opportunities abroad. Through two-way direct investments, they also had access to, and mutually benefited from, technological innovations and processes developed both in North America and elsewhere.

In the North American context, freeing up capital flows has not been part of formal negotiations between Canada and the United States. In both countries, this has largely been a domestic endeavour. This means that the integration of Canada-U.S. capital markets has proceeded as fast as the Americans and the Canadians have been able to reduce domestic impediments to movements of capitals across the border.

One such and still existing impediment – perhaps the biggest – is the different sets of rules and regulations in the matter of capital gains taxation. In general lines, both the United States and Canada make use of a ‘Withholding Tax’ applicable to non-resident investors. But what differs greatly is the percent rate. If the Seller is a non-resident of Canada, he must apply for and obtain a Clearance Certificate from the Canadian Customs and Revenue Agency (CCRA) and provide the Buyer with this Certificate. The Certificate exempts the non-resident Seller from the withholding tax if the Buyer is a Canadian resident. It normally takes four to six weeks for the CCRA to issue a Clearance Certificate. If a Clearance Certificate is not provided to the Buyer, then the Buyer must hold back one-third of the sale price until the Certificate is provided. Conversely, the withholding tax applied in the United States in similar circumstances, i.e. of a non-resident Seller transferring an interest in land to a non-resident Buyer is only ten percent of the sale price.

Another great impediment to a freer flow of investment capitals has been the gap created by the conversion rate between the two currencies, which gap, however, has been steadily diminishing these past few years.

And last, but not least, there is the fact that the economies of the two countries are significantly different. Not only is the American GDP (US$13.049 trillion) approximately 15 times larger than the Canadian (US$880 billion) – the very economic philosophies of the two countries are diametrically opposed. America’s capitalism is based on consumption and gives priority to consumerism, that is spending as opposed to saving. Canada, on the other hand, does exactly the opposite by giving, in fact, priority to saving.

It follows, therefore, that a prerequisite towards capital integration would be the ‘harmonization’ of a number of federal, provincial and state regulations. Any such ‘harmonization’ would not have to make the regulations identical, but only compatible – pretty much following the footprints of the 25-member states of the European Union. There are efficiency gains to be made on both sides by moving to common regulatory standards in North America. Not only would common standards reduce the costs of compliance, they would also allow investors to actively participate on a more level playing field.

Fundamentally, the decision to deepen economic integration in North America is a political one that the United States and Canada would have to make. From a purely economic perspective I have, as an economist, a strong predilection for continuing to tear down barriers — preferably multilaterally but, realistically, first within North America. Over the long haul, this is going to encourage a more efficient, productive and integrated economy, greater opportunities for investors and, most importantly, higher living standards. And economic theory and the experiences of other countries support the view that, on balance, the benefits of opening up outweigh the costs.

Sunday, August 27, 2006

Mini Houses

A solution to the affordability crisis.

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Who says that bigger is better?

The affordability indexes of all large urban centers in the United States and Canada are reaching disproportionate levels these days, ranking North America in third place after East Asia and Europe on the scale of the world’s most unaffordable places when it comes to housing. Tokyo and Hong Kong, with an average resale value of U.S.$1,100 and U.S.$900 per square foot approximately have turned into cities of sardines, with people reduced to live in 300 square foot cubicles to afford a roof over their heads. And here in North America we are poised to follow suit pretty soon.

The affordability crisis is a very serious matter indeed. It has economic, political, social and demographic reverberations and repercussions. The primary culprit and cause of the crisis is the ratio between wages and real estate market values. This ratio is entirely skewed to values. Whereas, for example, market values in metropolitan areas in Canada have appreciated an average of fifteen percent per year for the past five years - or a total of seventy-five percent since 2001, salaries have increased an average of four percent per annum – or twenty percent total. There is, therefore, a fifty-five percent gap, which accounts for the problem buyers are facing today when it comes to go to the bank and qualifying for a loan.

In the past few years consumers have tried to obviate to the crisis of affordability by relocating or purchasing farther away from the urban core. But with prices of gasoline higher today anywhere from twenty to twenty-five percent than they were in 2004, and with the expectation looming on the horizon that price of crude will top the $80 per barrel in the relatively near future, long commuting is increasingly putting a dent in the convenience of living well out into suburbia. Additionally, researchers peg the cost per bbl. at a staggering US $100 by 2010. If this condition will occur, the average consumer will pay US$60 for a tank fill up in 2010 as opposed to US$40 today. Moreover, the oil industry anticipates that the world global output will have peaked by the year 2015, which then is a sure sign that from then on the US $100 per bbl. price tag will be there to stay for a very long time.

As such and in light of the foregoing, cities in North America, which are already energy inefficient, are destined to become even more and more so. It is going to cost too much to commute from one side of town, where one lives, to the other side of town, where one works, even with carpools or public transit. It will become too expensive to heat and light 2,500 square foot homes when, in fact, most people can enjoy them only in their free time over the weekend. A recent study undertaken on behalf of the US Department of Energy details that home heating costs can be expected to skyrocket in the forthcoming years. For example, the Department of Energy predicts that homes heated with natural gas could see their fuel costs explode by as much as 48 percent by 2007. And the cost of home heating oil could surge by up to 32 percent. It is the general consensus, therefore, of those involved in economic anticipatory forecasting, that by the end of the decade consumers will mostly demand smaller living quarters, and more affordable.

For all the foregoing reasons, municipalities across the continent are focusing on developing a number of new housing types, and testing their feasibility. Work includes an extensive review of small-scale housing projects across Canada and the United States, as well as discussions with local housing developers about economic viability and marketability. These new housing types are also reviewed and refined in consultation with staff from Planning, Engineering, Housing, Real Estate, Fire Prevention officials and City Building inspectors.

Often overlooked, but an important design consideration affecting the total energy used by the home, is the size of the home. Recent statistics compiled by the US Department of Energy show that new homes on average use more energy than older homes, partially due to larger size, increased use of air-conditioning, and the widespread use of numerous electronics. While home size will likely be determined by factors other than energy efficiency, considerations are now on the drawing board as to whether the same function can be delivered in a smaller package. The general idea behind all these efforts is to provide additional capacity for ground-oriented housing. The hope is to offer a more affordable alternative to the single-family home, while maintaining many of the desirable qualities of this type of housing. Providing these choices within the city core is important to long term growth and sustainability.

The basic parameters guiding the writing of the new construction projects vary from town to town, and take into account factors such as density, size and values of existing developments, as well as anticipatory demand based upon public response obtained by random surveys, which show support and interest for similar forms of housing. Plus, guidelines are laid out to ensure attractive building design, quality materials, landscaping and neighbourhood fit.

For example, a Policy Report and Project Study undertaken here by the City of Vancouver for the Standing Committee on Planning and Environment to put up one such type of housing development in the Kingsway and Knight Corridor – pretty much in the centre of town - has determined the following guidelines:

More importantly, the City of Vancouver anticipates that over a 20-year period, the redevelopment of the entire neighbourhood would generate approximately 800 net additional units for 2,500 more residents, over and above what might be expected if the zoning were to remain unchanged.

Architects and home designers are coming to grips with the realization that comfort has almost nothing at all to do with how big a space is but, rather, that it is attained by tailoring our houses to fit the way we really live. This, coupled by the opportunity given to contain an ever more rampant crisis of affordability, makes the concept of mini-houses a sure winning bet with real estate consumers in the very short term.

Thursday, August 24, 2006

Still No Bubble

Housing prices have declined, but for reasons that have nothing at all to do with bubbles. A quick outlook on 2007.

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Prices of residential real estate, both asking and selling prices, have declined steadily in many markets throughout the country these past few months, but for reasons that have nothing at all to do - not even remotely - with the dreaded real estate bubble so many ‘bubbleologists' were so fond to predict. ‘Bubbleologist', it will be recalled, is the term I have coined specifically to encompass those individuals - all of them of majority age - who specialize in the very fine art of wasting my time.

An economic bubble occurs when speculation causes prices to increase, thus producing more speculation and subsequent price increases. The bubble bursts when prices of goods are so absurdly high that consumers either refuse or cannot afford to purchase, thus sending demand tumbling down. In essence, an economic bubble is a particular market condition, wherein prices of commodities or assets increase to levels so high as to no longer reflect the utility of usage of the commodities or assets being exchanged.

The main cause of an economic bubble is speculation. Speculation is one of the many forces that act on capital at any given time. In theoretical Economics, speculation is defined as ‘the acquisition of financial or capital assets made solely to quickly profit from fluctuations in their prices, or of goods or commodities with no real intent to consume or otherwise use them for production'. Speculation, however, does not seem to be the root cause of the price deflation occurring in many real estate markets.

The main cause of price deflation in the buying and selling of real properties seems to be due to the double effect of 1) a tightening of the money stock which, in turn, alters the cost of borrowing, i.e. a shift in interest rates, and 2) an increase in inventory supplies. Specifically the monetary policy initiated by the Maestro, Alan Greenspan and adopted by the new Fed's Chairman, Prof. Bernanke, is now beginning to have an impact on housing markets in the United States and, to a lesser extent by reflection, in Canada. On August 8, 2006 the Rate-setting Committee of the Federal Reserve System voted to halt the interest rate hike, holding the federal funds rate at 5.25 percent. This signalled a reversal in the trend that has characterized US monetary policy for the past seventeen times in a row.

The Fed admitted that core inflation is high at 2.4 percent annualized for the half-year ending June 30, but the expectation is that it will begin to abate in the latter part of 2006. If it does not, they will start tightening the money stock once again. The Fed has long relied on three factors to keep price pressure in check: quiescent labour markets, fat profit margins and its own credibility. It remains sure of the last, but can no longer count on the first two.

This last meeting reflected the fact that productivity grew at an annual pace of just over 1.1 percent annualized in the second quarter, not nearly enough to offset a recent acceleration in wages. Which means that for all the fuss we hear about oil, labour is the commodity with the biggest impact on inflation, accounting for two-thirds of production costs. Exactly for this reason, therefore, Prof. Bernanke has made a reference and has given a warning at the meeting of August 8 of the dangers of what he terms ‘inflationary psychology'. If people suspect that faster inflation is here to stay, they will anticipate it in their wage claims and price-setting, thus confirming their own suspicions.

This warning is very well heeded, if one considers that according to a survey conducted in July by the University of Michigan, American consumers expect the prices they pay to rise by 3.2 percent over the next twelve months. And this includes, of course, housing.

The slowdown in growth evident in the last quarter and reflected in the real estate sector was not an accident. It is due to the rate increases that the Fed has voted consistently over the last seventeen meetings. The Fed's latest projections, unveiled on August 8, forecast growth of 3.25 - 3.50 percent this year and 3 - 3.25 percent the next, slow enough to stop core inflation from rising much further.

Therefore chances are high the real estate market will continue to be generally stagnant for the next few months, with regional exception. Although no bubble is on the horizon.

Sunday, August 20, 2006

Assignees, Nominees And Other Extra-terrestrial Buyers

Assignments of real estate contracts.

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This world would be unquestionably a simpler place to live in, if one was at least given the right to know whom he is selling his own house to. But after nineteen years of real estate sales practice, I have come to the realization that this is not meant to be.

The common law Doctrine of Privity as it relates to contracts provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. In essence, the Doctrine of Privity of Contracts simply states, that only the parties to a contract have the right to sue or be sued under it. This means, generally speaking, that third parties who get a benefit under a contract do not have the right to go against the parties to the contract beyond the entitlement to such benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.

However, one exception to this doctrine is that for contracts, which create an interest in land. Contracts involving real property ‘run with the land’, so that a new property owner can sue or be sued on a contract, even though he was not a party to it. A second exception to the Doctrine of Privity is an assignment

In an assignment, a person (called ‘the assignor’) can assign to a third party (‘the assignee’) his entitlement to benefits arising out of a contract. If he does so, the third party has the right to sue to enforce those benefits. Obviously, a person cannot assign liabilities under a contract.

There are two types of assignments: statutory and equitable. A statutory assignment has three essentials:

[ ] The assignment is in writing.

[ ] The assignment is absolute, that is for the whole amount, and unconditional.

[ ] Notice of the assignment has been given in writing to the original promissor.

If any of the foregoing essentials is missing, the assignment might still be equitable. Statutory and equitable assignments are enforced differently by the Courts. In an equitable assignment all three parties must be named as parties in a court action to recover the amount outstanding. In a statutory assignment, on the other hand, only the original promissor and the assignee are named as parties to the action. The assignor is not a party to it.

An assignment does not alter the rights of the parties to the original contract. The assignee has no better legal position than the assignor had. More specifically, he receives the assignment subject to any defenses, which could have been raised between the original parties. If the assignor has properly assigned his rights, he is free from any further liabilities. It is now up to the assignee to collect the benefits of the original contract. Should the assignee fail, he cannot sue the assignor for it.

Finally, the original promissor does not have to make payments to the assignee until he receives proper notice. Once this notice is received, the original promissor must pay to the assignee – and not the assignor – even though he has not consented to the assignment.

Although no one can assign his liabilities under a contract, as stated above, a promissor can have his obligations performed by someone else. For instance, a promissor can require his employee or sub-contractor to perform his obligations under a building construction contract. Where a promissor has someone else perform his obligations under a contract, it is called ‘vicarious performance’. Vicarious performance is not an assignment, in that it does not result in the substitution of one the original contracting parties for another.

In the aforesaid example of a building construction agreement, the original contractor (promissor) is still liable to the other contracting party. In addition, the sub-contractor who performs vicariously cannot be sued by the other contracting party for non-performance. Only the building contractor can sue the sub-contractor, and this is so because of the privy of contract intercurrent between the two of them.

Thursday, August 17, 2006

The Importance Of Taking Deposits

The trend in the industry of taking no deposits at all is dangerous and counterproductive.

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There is a trend in the industry in this day and age of not taking deposits from Buyers, when it comes to servicing accepted offers prior to the conditions precedent being removed. The rationale behind this is to make the offer ‘less onerous’ on Buyers. Additionally, there is the widespread belief that since once a deposit is received the brokerage firm must open immediately a trust account, all this may become wasted effort in the eventuality that the conditions precedent are not removed by the Buyer.

A deposit is the amount of money normally paid by a Buyer at the time the offer is signed, or alternatively a short time after the offer has been accepted by the Seller. Many people wrongly believe, that unless a deposit is paid when the offer is made, there is no binding contract. This is untrue.

The three main requirements for a contract are offer, acceptance and consideration. The offer and acceptance are pretty clear, but some confusion exists as to what consideration really is. Consideration is something to be done, or promised to be done, by one party in return for something to be done, or promised to be done, by the other party. A Contract of Purchase and Sale is in essence an exchange of promises. The Seller promises to convey title to the land to the Buyer on completion date, and the Buyer promises to pay the purchase price to the Seller on the same date. Thus, paying a deposit is not a requirement at law for a contract to be binding on the parties to it.

A deposit is part of the down-payment of the Buyer, that is the portion of his own money the Buyer uses, that does not involve financing. It can be any amount or, sometimes, no amount at all as in the case of a one-hundred percent financing transaction.

If the Seller refuses the offer, the deposit must be returned to the Buyer forthwith. This is done by the broker drawing a trust cheque on his trust account. A problem arises when the original deposit cheque is uncertified. The broker would be unwise to issue a cheque on his trust account, until he knows that the deposit cheque from the Buyer has been honored. In the meanwhile the Buyer will likely be annoyed, because he probably cannot make another offer on a different property until the deposit is returned from the broker.

There are two ways to avoid this inconvenience to the Buyer. The prospective purchaser can be advised to pay the deposit in cash, or by money order or certified cheque. Or a very small deposit, or no deposit at all is obtained at the time the offer is signed. However, the agreement provides that if the offer is accepted, the deposit will be paid, or will be increased of a certain sum with 24 hours of acceptance, or some other reasonable time within the context of the offer. Sometimes a further increase is required either at the time all conditions precedent are removed, or shortly thereafter.

The general idea behind a deposit is to allow the Seller to have a remedy at law, should the Buyer default on his promises. If the Buyer has no assets, the Seller is left with no remedy against him, should the Buyer later on decide not to complete. But even before that, a deposit assures the Seller that the Buyer will carry out his ‘due diligence’ under the contract, prior to the subjects being removed.

If, for example, an accepted offer contains a subject to financing, a subject to title search approval and a subject to inspection clauses, all to be removed within five days after acceptance of the offer, a paid deposit will have the dual beneficial effect of ensuring the Seller that the Buyer will carry out the terms of the accepted offer and, at the same time, to induce the Buyer to do just that. In this respect, therefore, a deposit is an indication to the Seller that the Buyer is serious and committed to finalize the contract.

Seen from this perspective, the inconvenience that the broker will go through, should the subjects not be removed, of opening and then closing a trust account is small matter compared with the proof given to the Seller of the serious intentions of the Buyer. It is also a great tool at the Realtor’s disposal, to distinguish between serious Buyers and those who merely want to ‘test’ the Seller, as in the case of those Buyers – unfortunately more and more frequent these days - who have paid no deposit whatsoever and try to renegotiate the contract price prior to removing the subjects.

Saturday, August 12, 2006

The Canadians Are Coming … The Canadians Are Coming

Seen from the 49th parallel, American real estate all of a sudden looks darn cheap.

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As the Yankee Dollar continues to slide and the Loonie breaks the 90-US cent barrier for the first time since 1977, all of a sudden everything that is American – from MacDonald’s hamburgers to real estate – looks darn cheap to Canadian eyes.

The $US/$CAD Noon Rate hit 0.9032 as reported by the Bank of Canada, and the Loonie is predicted to equal the Greenback by close to year’s end. There are essentially four major key reasons for the recent surge of the Canadian Dollar vis-à-vis its American counterpart:

[ ] A substantial increase in demand for Canadian commodities, most notably oil and precious metals, from the United States.

[ ] A rising participation of American interests in the exploration and development of Canada’s natural reserves, and a subsequent increased demand for shares in Canadian companies.

[ ] A steady increase in Canadian interest rates, which are moving at a faster pace than the corresponding increases of the Feds, and which in turn attract foreign investors.

[ ] Financial leverage, which is higher in Canada than in the U.S.

This last point deserves a closer scrutiny, as it is directly related to real estate, my field of expertise and practice. Financial leverage takes the form of borrowing money and reinvesting it in hopes to earn a greater rate of return than the cost of interest. Leverage allows greater potential return for the investor than otherwise would have been available. Because real capital appreciation has been constantly more remarked in Canada than in the United States these past few years, it turns out that leverage is stronger in Canada than in the U.S., meaning the spread between real capital appreciation and cost of borrowing is higher in Canada. And this notwithstanding the fact that mortgage rates in Canada are typically nominally higher than in the States and that, in fact, wages in Canada are typically nominally lower.

The last time the Canadian Dollar was at par with the American Dollar was in 1976, just before the election in Quebec of the separatist government of Rene Levesque (1922 – 1987). Following that election, the Loonie began a long downfall, greased by weakening commodity prices and rising government deficits and domestic debt. The slide culminated in the record low of 62 cents U.S. for one Canadian Dollar in January, 2002.

The current exchange rate, therefore, represents a huge increase with drastic consequences on both sides of the border. For instance, a house priced at U.S.$350,000 would convert in CAD$564,500 approximately using the U.S.$1.00=CAD$0.62 exchange rate of 2002. The same U.S.$350,000 residential property costs a mere CAD$387,500 using today’s U.S.$1.00=CAD$0.9032. That’s a difference of CAD$177,000 in a little more than four years or, to put it differently, a price depreciation of approximately 31.35 percent in four years, or 7.838 percent p.a.

It sure beats the yield of treasury bonds, both in Canada and in the United States!

It is even easier to see how appealing has American real estate become for Canadian investors if we look, for instance, at the average rental property that would sell across the border from where I am. In 2002, rental properties would sell for an average US$80,000 in Washington State, or CAD$129,000 using the 0.62 cents conversion rate of that time. Now the same rentals sell for an average US$115,000, or CAD$127,300 approximately using the 0.9032 rate. Even though they have appreciated in value and are, therefore, more expensive for Americans, they have become actually less expensive for Canadians.

Interestingly enough, the Loonie has not been rising rapidly against other key currencies like the Euro and the Yen. A fact, this, which underscores that Canada and the United States have become mutual major trading partners, setting aside disputes and differences of opinion in the matter of salmon fishing and lumber subsidies of years past. In fact, the Canadian Board of Trade reports that over 70 percent of the manufactured goods produced in Canada are destined for the American markets, as opposed to only 25 percent in 1980. And Uncle Sam has increased his stake in Canadian holdings by 55 percent in the same period, with the latest acquisition being the purchase in December, 2005 of the entire stock of Terasen Gas, the exclusive distributor of natural gas in British Columbia and Alberta, by Kinder-Morgan LP of Austin, Texas.

There are, to be sure, some economic downsides that attach to an equal conversion rate, mostly because the two economies are significantly different. Not only is the American GDP (US$13.049 trillion) approximately 15 times larger than the Canadian (US$880 billion) – the very economic philosophies of the two countries are diametrically opposed. America’s capitalism is based on consumption and gives priority to consumerism, that is spending as opposed to saving. Canada, on the other hand, gives precedent to saving, so that Canadians are cash and equity richer, even in the instances when they actually make less money. Which, at the end of the day, makes Canada a much more stable environment.

This goes a long way to explain why the American economy is far more susceptible to interest rates variations: with a domestic debt load nearly double, the economic ripples caused by shifts in cost of lending travel twice as far in the U.S. than in Canada. A fact, this, that is also reflected in the weakness of the Greenback vis-à-vis the Loonie.

So therefore, Canadian companies stand to lose competitiveness in Trade from a situation of exchange equality or near equality, since manufacturers North of the 49th parallel have to reduce productions costs and, at the same time, apply leverage on the economy of scales to increase productivity, in order to remain competitive in American markets. But, on the other hand, an increased international demand for the Greenback caused by a surge in demand for American real estate products by Canadian investors may cause a corresponding surge in domestic interest rates, which in Finance may cause a further imbalance in the US ‘debt service ratio’ - the ratio of the mortgage payments to disposable income, already at a whopping 47 percent in the United States.

Wednesday, August 09, 2006

The Substance of Style

Is it demand, or is it desire? Explaining what drives innovation and change in real estate.

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How many times have you heard that curb appeal is half the sale? Why is it that certain ethnic groups are so keen at using tiles and marbles, whereas others prefer hardwoods and plaster? What’s the scoop behind the trend of new construction – more bedrooms, more bathrooms, higher ceiling clearance? What makes a neighborhood trendy? Why is it that fashionable colors, all of a sudden, are no longer fashionable? In essence, what is it that drives innovation and change in real estate?

Gianni Versace (1946 – 1997), perhaps the most famous Italian stylist and designer of contemporary times, and Andy Warhol (1928 – 1987), one of the major figures of the American Pop Art movement, both had an innate knowledge of one of the most profound tenets of economics, that is the production of wealth comes not simply from labor or raw materials or even intellectual brilliance. It comes from new ways to give people what they want. By matching creativity and desire, the economy will renew itself. Thus, it is imperative to abandon prejudices regarding the sources of economic value.

It follows, that manufacturing and technology generate wealth only when they make matter and information serve human desire. Desire is the true source of economic value, and the motor behind demand. So, to exploit any market – being fashion design as in the case of Versace or Pop Art as in the case of Warhol – since people want pleasure, those who bring pleasure will make the economy go, because what is bringing pleasure is anticipated status enhancement. This rule of thumb applies all the more in a big-ticket industry such as real estate.

Contrary to what most of us believe, humans do not make rational decisions, at least not pre-eminently but, rather, their conclusions are rooted into deeper sources of motivation located well within the realm of sub-consciousness. Marketers already seem to know a lot about how consumers think, but recent experiments in neuroscience have captured the full attention of Corporate America and Corporate Japan. New scanning techniques are making it easier to determine how our minds work and creating hopes in the corporate world, that companies can finally figure out how consumers are wired so as to establish new connections with customers. And the field of real estate sales is at the forefront of this scientific research.

The breakthrough behind all this is the development of functional magnetic resonance imaging or ‘fMRI’, the latest in neuroimaging technology, which displays not only the structures of the brain but also how they actually function by measuring blood flow. And the corporate world is particularly interested in how neuroimaging can be applied to study empathy, trust, deception, emotional communication, body language and generally speaking all issues that are central to human existence and interaction. Decision-making is, of course, at the top of the list.

Research, especially in real estate, indicates that consumers love novelties and, what’s more, can create novelties. Consumers are not mere passive recipients of goods and services but, rather, active producers as well. The reason is that at the basis of production and consumption there is human imagination and desire for novelty. Furthermore, when people actually ‘own’ novelties in the form of goods, they set about to convince others that the possession of such novelties shows that they have achieved a higher status, and that if others were clever enough to do what they did or to possess the same things that they have, then the others too could achieve high status and enjoy all the good things that come from it.

The continuous interaction between desire and demand on one side, and production and supply on the other side, is what rejuvenates and regenerates real estate markets through trends and innovation over and over again.

Thursday, August 03, 2006

Iran's Nuclear Blackmail

Think you are paying too much for gas now? Wait until Iran gets its nukes!

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Although not particularly superstitious by nature, I have come to the realization that kissing, in the world of politics, is a foretelling sign of ominous things to come.

For instance, think at what happened after Vyacheslav Molotov (1890 – 1986) and Joachim von Ribbentrop (1893 – 1946) kissed in the wake of the Nazi-Soviet Non Aggression Pact of 1939. How about when Leonid Brezhnev (1906 – 1982) kissed Mao Tse-tung (1893 – 1976) a few months before the international incident on the Ussuri River in 1969, which signed the end of the ‘intellectual’ alliance between Soviet Russia and Red China, and that almost catapulted the world into WWIII. Or even the famous kiss between Mikhail Gorbachev (1931) and Ronald Reagan (1911 – 2004) in 1988, right before the collapse of the Soviet Union, although this could hardly be described as a foreboding sign of omen – unless, of course, one is a Bolshevik communist.

And why is it that only male politicians kiss, and never female politicians, is yet another mystery of life. No one ever dared kissing the Iron Lady, Margaret Thatcher of Britain, or Madeleine Albright. And when the present US Secretary of State, Condoleezza Rice – herself otherwise a very kissable lady - trots around the globe, all foreign dignitaries are kept a safe distance away, just in case. This is the reason why I personally would fire all the male politicians and support replacing them only with females: at least if they kiss, the ladies would have the decency not to show me on TV - but I digress.

So therefore, if history teaches anything at all, what are we to make of the latest quasi-amorous engagement and great effort of getting a taste of each other of Hugo Chávez of Venezuela and Mahmoud Ahmadinejad of Iran? Seen from the cameraman’s angle, that was not just a kiss. Those two went very close to a lip-to-lip encounter of the third kind, something to make a Frenchman green with envy. All of which makes any prediction of future events even more ominous.

Mahmoud Ahmadinejad, a civil engineer by profession and the Sixth President of the Islamic Republic of Iran, is a confirmed believer in the coming apocalypse. Like Judaism and Christianity, Shiite Islam has its own version of the messianic return - the reappearance of the Twelfth Imam. And as in some versions of fundamentalist Christianity, the second coming will be accompanied by the usual trials and tribulations, death and destruction. The Iranian press, in fact, has quoted Ahmadinejad as saying in official meetings that the Imam will reappear in two years. Exactly two years.

Couple this with his intention to press ahead with Iran's nuclear program, the staunch anti-Israel rhetoric, and his repeated calls for Israel “to be wiped off the map” and it becomes very easy to anticipate where Iran's nuclear weapons will be aimed at, once they are up and armed. As a matter of fact, everyone knows already that they will be put on Shahab rockets, which have been modified so that they can reach Israel.

So, what do we have here? A Holocaust-denying, virulently anti-Semitic, aspiring genocidist and certifiable lunatic on the verge of acquiring weapons of the apocalypse, who believes that the end is not only near, but nearer than the next American presidential election. Who likes to entertain Hugo Chávez of Venezuela, another certifiable lunatic, whose mainstream political ideology consists in the public proclamation that Jesus of Nazareth was a radical activist, who purportedly emphasized and sought redistributive social justice and democratic socialism.

Sure, this may very well be a valid theory, but there are a few things that just do not balance out.

First and foremost, on closer scrutiny, a nuclear strike on Israel – assuming for a moment that Israel would allow that to happen with impunity – would cause just as many Muslim casualties as Jewish, if not more. Not only all the Palestinians would be wiped out, but also a great many Syrians, Lebanese, Jordanians and Egyptians would suffer the same faith. Secondly, a retaliatory strike from the United States and Western Europe would put an end to the existence of modern Persia, as we know it. Thirdly, what’s the point therefore in attacking Israel if, afterwards, your days – your hours, in fact, are numbered. And fourth, Islam would break apart and collapse, both in its social and economic structures, as well as a form of human civilization.

Surely it would not please Allah to see all these many followers perish in vain, in exchange for a comparatively handful of Jewish lives. Talk about omen!

Yet, Mahmoud Ahmadinejad and Hugo Chávez have two other things in common, besides being strange. They are both price hawks within OPEC, having pushed for stringent enforcement of production quotas and higher target oil prices. And they both need petrodollars – and lots of them - to finance their otherwise faltering economies and great ambitions.

Chávez has long since learned, that any time he announces his purportedly ultimate goal of cutting oil supply to the United States entirely (he has announced it publicly a few times already), the international markets get the jitters and react by sending the price of crude up to the sky, if but for a short time. And Ahmadinejad is now beginning to discover, that he can do the same – better, in fact - by sticking to his program of uranium enrichment in open defiance of the wish and will of the United Nations. It is, in fact, the news of the day that oil teetered above $74 a barrel, a near record high, as mounting tension over Iran's nuclear plan compounded worries of global supply disruptions amid forecast of falling fuel stocks in the United States. Prices were within striking distance of their all-time peak of $75.35 a barrel on April 24.

All this after Iran merely reported, that it has succeeded in purifying uranium to 4.8 percent, at the top end of the 3 to 5 percent range used in nuclear power plants. So, can anyone imagine where price of crude will go, once Iran gets its nukes and threatens to drop them on Israel every other day?

Ah, these Mullahs! The more I watch them on TV, the more I think they need a shave. How could anyone possibly would ever want to kiss them?